Cablevision’s Viacom Lawsuit: How We Got Here

The lawsuit is the latest flare-up in what’s become an increasingly acrimonious relationship over affiliate fees.

Why can’t we be friends?

You may have read yesterday that Cablevision is suing Viacom for forcing it to take lower-rated channels along with its most popular networks, a practice the pay-TV company claims is illegal.

Cable operators and networks weren’t always so adversarial. After all, they’re in a mutually beneficial business. Every cable subscriber means money not only for the operators, but for the networks as well.

That’s the way the business works: If you sign up for Cablevision’s cable TV service, you’re now also a customer, indirectly, of Viacom. For each subscriber Cablevision signs up to watch Viacom’s cable networks, it pays the media company an affiliate fee.

So even though you pay your cable bill to Cablevision, some of that money is also flowing to Viacom if you get channels such as MTV, Comedy Central and Nickelodeon. And, yes, money also flows to Viacom for its less popular channels such as VH1 Soul, MTV Hits and Nicktoons.

SNL Kagan

Basic cable network affiliate fee revenue

Cablevision’s lawsuit is the latest fissure in what’s become an increasingly acrimonious relationship over affiliate fees, which have gone through the roof. Programming fees are set to rise at least 10 percent this year for the largest pay-TV operators, Comcast and DirecTV. Companies like Cablevision won’t raise prices on their customers that fast because they fear subscribers will cancel their service.

Of course, Viacom loses, too, when cable-TV subscribers quit. But Viacom can still make money from those who cut the cord through over-the-top options, such as Netflix and Amazon, which stream content over the Internet.

This leaves Cablevision in a tough spot. To make up the difference from customers who cancel video service, the cable operator will need to keep raising prices on its Internet service. Cablevision already announced it was raising broadband prices in 2013 by $5 a month per customer. But more price increases won’t easily make up the $88 dollars an average customer pays per month for Cablevision’s video service, according to Telsey Advisory Group.

So what happened? What caused affiliate fees to skyrocket and push pay-TV operators to the brink?

Retransmission consent fees: The 1992 United States Cable Television Consumer Protection and Competition Act allowed broadcasters to ask for money from pay-TV operators in exchange for carrying their programming. This meant that CBS, NBC, ABC and Fox could start charging for their local affiliates, owned by companies like Gannett and Sinclair Broadcast Group, and national networks. These channels used to be free. In 2012, they cost pay-TV operators $2.4 billion, according to data compiled by Bloomberg. If operators are now paying billions for retrans fees, their belts become a little tighter with all of the other cable networks in the industry.

Sports became cable’s glue: Whether it’s “Monday Night Football” or your local baseball team, you’re paying big bucks to watch sports on TV. Contracts for sports rights have jumped in price as demand to watch games remains high and live events become essential for why people need cable at all (instead of an online-only option like Netflix). That’s led ESPN, the top-rated sports network, to charge about $6 a month per subscriber, according to Kagan. Regional sports networks typically charge a few bucks per month, too. It’s caused DirecTV, Verizon FiOS and Cablevision to introduce additional monthly fees to customers in recent months to absorb the costs.

Cable programming improved:The most popular drama on TV right now is AMC’s “The Walking Dead.” That’s for all television — broadcast included. Guess what that’s going to prompt AMC Networks to do when its next rights contract is ready for renewal? It’ll charge your cable provider more, and your cable bill will rise. AMC is going to want to be compensated for shows that cost more to make and generate big ratings. Does it matter that AMC Networks also owns lower-rated networks such as IFC and WE TV, and Sundance Channel, which isn’t rated at all by Nielsen? Not if AMC can bundle those networks with its flagship station. They’ll get paid for them, too. And that’s what the Cablevision lawsuit is all about.

There are other reasons the relationship isn’t what it used to be:

The introduction of online competition made content less exclusive.

Programmers demanding additional payment for online rights lead to slow progress on what’s known as TV Everywhere.

Diminished household formation from the recession meant fewer new homes with cable connections, which put pressure on operators’ profit margins.

Cable TV has become a low-growth, mature industry.

But it’s the rising cost of cable TV that may transform the industry. Cablevision’s lawsuit can be seen as an attempt to slow down what could eventually lead to a huge drop in profit for pay-TV operators — and low-rated cable networks — everywhere.